Poland: MPC dovish on economy and inflation, but in denial that swift rate cuts are needed

Poland: MPC dovish on economy and inflation, but in denial that swift rate cuts are needed
Michal Dybula - Market Economics | 10 Apr 2013 16:06

The MPC left interest rates unchanged, in line with expectations. While the post-meeting statement highlighted the weakness of the economy and major disinflation, the Council made also clear that its upcoming decision will depend on the probability of inflation remaining considerably below the inflation target over the medium-run.

The important words were "considerably lower" and "medium-term". We reckon that "considerably lower" is probably at or below the 1.5% lower bound of the inflation target band and "medium-term" is one to one-and-a-half years ahead.

Such statement means that further CPI disinflation to below 1.0% y/y soon will not necessarily force the MPC to cut rates, unless disinflation is accompanied by significantly weaker real economy. In light of no VAT rate cut in 2014, the medium-term CPI path is anyway automatically lifted up (though it means weaker GDP growth and consumption next year and should support a stronger disinflation in 2015).

The post-meeting statement of the MPC and the comments by Governor Belka, suggest, that a rate cut in May is much less likely than we had expected before today's meeting. Moreover, should the Council leave policy unchanged next month, the probability of a June cut will not be necessarily higher, since only in July the MPC will read and digest the new GDP and CPI projections of the NBP.

Michal Dybula
Central and Eastern Europe Economist